Analysis: Eircom's debt restructure suggests the company was soldcheaply, writes Jamie Smyth

Eircom's decision to restructure its debt was widely expected given the current environment of a booming international bond market and historically low levels of interest rates.

It makes sense for the company to shave 2.5 per cent off its current interest rate payments on bank debt and issue a fixed rate bond that offers greater stability.

But yesterday's announcement by the firm will raise a few eyebrows among the 500,000 former Eircom shareholders who lost money after the firm's flotation in 1999.

The ability of Eircom to make a €512 million payout to its US venture capital backers and its employee trust so soon after the acquisition, suggests the telecoms firm was sold cheaply.

Under the refinancing deal, Valentia's shareholders will net about half the original equity which they used to buy Eircom. In the process, Eircom's debt will rise, raising concerns about Valentia's commitment to invest in the State's main telecoms infrastructure.

Certainly, Eircom's performance in the past year - turning a €51 million loss in the year to the end of March 2002 into a €180 million profit in 2003 - suggests it will be a cash cow for Valentia.

Despite a few nasty surprises contained within the bond documents - including a pension deficit of €325 million and the disclosure of multiple law suits filed by employees alleging exposure to asbestos - Eircom's bond issue looks very attractive.

Although the fixed-line market is contracting in the Republic, Eircom's 2003 results did not benefit from recent increases in line rental charges or the expected uptake in broadband services.

The firm has a target of connecting 100,000 to its i-stream service by December 2004, which should increase revenues significantly.

One of the biggest challenges Eircom will face over the next three years is further streamlining its workforce to enable it to maintain competitiveness.

Flat revenues in the fixed-line telecoms market will require it to continue to reduce operating costs, the biggest component of which is made up of wages and salaries for the firm's 8,400 staff.

Eircom's divestiture of several subsidiaries, and a new voluntary severance scheme introduced by the Valentia consortium, has proved relatively successful with more than 4,500 staff leaving the payroll since 2001.

Yet despite taking 1,700 staff out of the business in 17 months, Eircom's total wage bill increased 2 per cent to €384 million in the year to March 2003 due to pay inflation.

This reduction in the workforce has also come at a price. A note in Eircom's bond offer document shows the company will have fully utilised a €412 million provision which it made in 2000 for redundancies by next March. Eircom's plan to reduce its workforce by another 1,000 people will have an impact on Eircom's earnings.

Taking into consideration the statutory protection afforded some Eircom workers and the 30 per cent stake held by the employee trust in the firm, streamlining Eircom further may prove a more difficult task.

Indeed, staff look set to be among the biggest winners of Eircom's privatisation, netting big dividend payments while consolidating their position within the firm. The Providence and Soros private equity funds, which together own 64 per cent of Valentia, and Sir Anthony O'Reilly who owns 5 per cent also look set to net a big pay day.